Could your loved ones benefit from a testamentary trust?

Often the last thing on our minds when planning our Estate is considering the tax effectiveness of our wishes. However, as this example explains, it can be costly not to.

Mary wants to leave her estate to her husband Tom. Tom currently pays the top marginal tax rate (including Medicare Levy) of 47%. Mary and Tom have 2 minor children who attend private schools and don’t earn any income. Assume that on her death Mary’s estate, if invested, would generate income of $40,000 per year.

If Mary left her estate to Tom outright (ie not in a discretionary testamentary trust) and he received $40,000 income per year then Tom’s after-tax position would be:

Income $40,000
Tax + Medicare Levy $18,800
Low Income Tax Offset (only applicable where taxable income is less than $66,667) Nil
Net Income After Tax $21,200

If instead Mary leaves her estate to a discretionary testamentary trust with Tom as the trustee and the trust income is distributed equally between the children, the after-tax position would be:

  Child A Child B Combined
Income $20,000 $20,000 $40,000
Tax ** Nil Nil Nil
Net Income After Tax $20,000 $20,000 $40,000

The discretionary testamentary trust saves $18,800 tax per annum, leaving more available to spend on the children’s education and welfare. The tax savings that can be achieved by using a testamentary trust will depend on the individual circumstances of the Will-maker and their family members.

In particular, it will depend on the tax position of their adult beneficiaries, how many children under 18 those beneficiaries have and the tax position of those children.

Read more about testamentary trusts here1, or contact us to discuss how you might benefit from incorporating such a structure in your Estate plan.

** In a testamentary trust, minors can receive tax free distributions up to $18,200 (2014/2015) or $20,542 (if low income tax offset applies)


The information and case study provided is based upon our understanding of taxation legislation which may change in the future.  This is not taxation advice and you should consider your own particular situation by speaking to your tax agent before acting.

1. The views expressed in this document are provided by Redchip Lawyers Pty Ltd, a company not associated with Liberum Financial Pty Ltd or Fortnum Private Wealth Pty Ltd.